Let’s take a look at some tax planning ideas that can be implemented during the year:
Following changes made by the 2017 Tax Cuts and Jobs Act (TCJA), each person now has a lifetime exemption of $10,000,000, adjusted annually for inflation, from federal gift and estate tax. In 2020, the life time exemption amount is $11,580,000 (or $23,160,000 for a married couple). Unfortunately, this exemption is set to revert to $5,000,000, adjusted for inflation, on January 1, 2026, unless legislation is enacted before 2026 extending this increase. Therefore, if possible, it may be a good idea to take advantage of the increase now.
In November 2018, the IRS announced that individuals who use their exemption from 2018 through 2025 will not be adversely affected when the exemption is reduced to the pre-2018 level after December 31, 2025. According to the Treasury Department and the IRS finalized regulations there will be no “claw back” of gifts made by taxpayers on or prior to December 31, 2025, regardless of whether the lifetime exemption amount is subsequently decreased. As a result, people planning to make large gifts until end of 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.
In 2020, individuals may make gifts of up to $15,000 per recipient without triggering the gift tax. Married couples (who are both US citizens), may make gifts of up to $30,000 per recipient. Gifts to a spouse who is a U.S. citizen are not taxed, regardless of the value of the gift. The annual amount which may be given to non-US citizen spouses without applying gift tax is now $157,000. It may be advisable not to gift assets that have significantly appreciated. Retaining appreciated assets until death will result in those assets being included in the taxable estate and receiving a step-up in income tax basis. That, in turn, may reduce the income tax that will be due if and when the assets are sold.
The Retirement Enhancement Act (SECURE Act), was signed into law on December 20, 2019, and changed the tax consequences of inherited IRAs. Prior to the Act, a person who inherited a retirement account (from a non-spouse), could “stretch” the payments from the inherited account based on his or her life expectancy, instead of the life of the original owner of the account, thereby keeping the funds in the retirement account longer, where the funds could grow tax deferred. According to the SECURE Act, anyone who inherits an IRA from someone who dies after December 31, 2019, can request to receive the payments over a period of no more than 10 years (some beneficiaries, including spouses and minor children, are exempt from this rule). Consequently, the funds will be subject to ordinary income tax once the 10-year period expires.
If a grantor trust owns assets with a low tax basis relative to their current fair market value, clients should consider exchanging those assets for assets with a high tax basis during the life of the grantor. This type of exchange should not be treated as a sale for income tax purposes, and, consequently, will not trigger an income tax. When the individual dies, under current law, the low basis assets that he or she owns will receive a “step-up” in basis equal to the fair market value of those assets at the time of death. If the assets are then sold, no tax will be owed on the sales proceeds up to the amount of the new “stepped-up” basis.
It’s never too early to plan, remember the early bird always catches the worm…
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.